Stateline Story

New Hampshire Gov Defies Tax Taboo

  • April 16, 2001
  • By Norma Love
Four years ago, Gov. Jeanne Shaheen not only broke New Hampshire's glass ceiling to become the state's first woman governor, she was the first Democrat elected in 16 years.

Now she's trying to break another glass ceiling -- New Hampshire's taboo against broad-based general income and sales taxes.

Shaheen is backing a 2.5 percent sales tax to pay for an estimated $225 million shortfall in the upcoming two-year budget. She would use sales tax proceeds to restructure the tax system by repealing New Hampshire's 18 percent inheritance tax and reduce several other taxes.

Though she's proposing a sales tax, she has not ruled out supporting an income tax. New Hampshire is one of only two states -- Alaska is the other -- without a general income or sales tax.

Shaheen's conversion did not come easily.

During her first two campaigns, Shaheen took the state's traditional "pledge" to veto the taxes -- a prerequisite to getting elected governor for 30 years.

The last two governors who renounced the pledge -- Democrat Hugh Gallen in 1982 and Republican Walter Peterson in 1972 -- lost.

In announcing for her third term in May, Shaheen said she could not make the promise "whatever the political price," then defied the hex by beating former U.S. and state Sen. Gordon Humphrey, a conservative Republican.

The victory made her only the fourth person in recent times to win a third, two-year term as governor. Republicans Meldrim Thomson and John Sununu and Democrat John King are the other three.Shaheen capitalized on a political landscape changed by a December 1997 state Supreme Court ruling. The court said providing an adequate education is a state obligation, and said widely varying local property taxes to pay for schools discriminated against children in poor communities.

Shaheen said she had to keep her options open to deal with the shortfall created when she and a deeply divided Legislature fought to a virtual standstill over how to pay for schools.

In 1999, both the House and Senate passed income tax bills to finance schools. Shaheen's threatened veto thwarted the effort. Instead, lawmakers enacted an unpopular, temporary statewide property tax and increased two large business taxes and several other levies. The interim plan left the shortfall in the next budget and expires in early January 2003, which makes replacing it quickly an imperative.

A former teacher, Shaheen, 54, asked voters to trust her to work with the Legislature to solve school funding after a blue ribbon commission she appointed reported in January on the impact different taxes would have on the state's economy.

Her road to victory wasn't easy within her own party. One of the Democratic sponsors of the income tax challenged Shaheen in the primary, winning 39 percent of the vote.

The general election also was a referendum on the issue.

Humphrey accused Shaheen of poor management and said the shortfall could be handled by limiting spending growth and capping school aid at this year's $825 million instead of distributing the $881 million in school aid required by state law next year.

Shaheen said Humphrey's plan wouldn't work and would lead inevitably to higher property taxes. Now, Shaheen faces stiff odds of pushing any tax restructuring planthrough the Republican-dominated Legislature.

Though she defeated Humphrey, Republicans took back control of the state Senate, 13-11, and won gains in the 400-member House. Some of the new Republican faces, particularly in the Senate, are conservatives who beat moderate Republicans who backed an income tax.

The major school funding plans -- including Shaheen's -- are scheduled for House votes on April 18 and 19. All propose doing something conservative Republicans oppose -- using a new broad-based tax to restructure the state's tax system.

That is the Armageddon ahead. That has been the political dividing line since the war over school funding began three years ago.

Shaheen tried and failed for three years to find an alternative to an income or sales tax before converting. Lawmakers repeatedly rejected her preferred solution, legalizing video poker.

House Republican leaders now propose to eliminate two business tax credits, reimpose a tax on nuclear power plant property and a 1 percent tax on car sales -- new or used -- to be paid when the vehicle is registered. They sweeten their deal by also repealing the inheritance tax, but they reduce the statewide property tax much less than Shaheen's plan.

Three hours after Republicans unveiled their plan, Shaheen, normally cautious about showing her intentions, said she'd veto it as bad economic policy.

Even if Shaheen prevails in the Legislature, she's mired in another battle in the courts over the constitutionality of the statewide property tax, which all the major funding plans use to keep the rates of companion income, sales or gross receipts taxes low.

The Supreme Court is considering the state's appeal of a lower court judge's ruling invalidating the tax. The judge ordered the state to repay the $884 million collected since it was enacted in 1999, but said a future hearing would be held on how to do that. And, Wall Street bond rating firms are warning they will downgrade the state's rating if a comprehensive solution is not implemented by July.

Shaheen has repeatedly warned lawmakers she won't accept any solution that fails to fund school aid into the future from a sustainable source and leaves New Hampshire with the lowest tax rate in New England. She also insists it must lower the statewide property tax rate and hold schools accountable for student performance.

Doing just enough to get by will mean the same fiscal "train wreck" as doing nothing, insists Shaheen. State and local credit ratings are at risk; the state will have trouble finding the cash to pay its fall school aid; businesses will be reluctant to invest while the uncertainty continues.

"I appreciate that it's not easy," Shaheen said in March. "It wasn't easy for me. But now is the time to do it. That's why they're elected, to make those tough choices. If they didn't want to make the choices then they shouldn't have run for re-election."